Stalled 767 deal may cost jobs

Up to 50 in Everett could lose jobs, others reshuffled in wake of tanker inquiry

By JAMES WALLACE, SEATTLE POST-INTELLIGENCER AEROSPACE REPORTER
| on February 20, 2004

With continuing Pentagon and congressional investigations into its 767 tanker deal with the Air Force holding its contract in limbo, The Boeing Co. announced yesterday that it may lay off up to 50 workers in Everett and will shift 450 there to other jobs.

The development raises more questions about whether Boeing will be able to keep building 767s in Everett unless it soon wins approval to build 100 of the jets for the Air Force as refueling tankers.

Boeing already has announced it will end production of another model, its 757, late this year because of slow sales.

And a source said Boeing is slowing production of its flagship 747 amid sluggish sales.

Stopping production of the 767, even temporarily, would threaten hundreds of jobs. Boeing won't say, but 450 to 500 Machinists now build the twin-engine widebody jet in Everett, according to people with knowledge of the employment numbers. Several hundred more workers are involved in the 767 commercial program.

"We expect that if the Air Force tanker deal is still in limbo by late spring-early summer 2004, Boeing will move to end production of the 767," Merrill Lynch analyst Byron Callan said yesterday in a report to clients.

His report was issued before Boeing Chief Executive Harry Stonecipher, in a message to employees, said the company was slowing its tanker development program, pending a resolution of investigations into the program by Congress, the Pentagon and others.

"We deeply regret the difficulties that this slowdown will pose on our Boeing employees and those of our teammates," Stonecipher said.

Some 100 contract workers in Wichita, Kan., where the tanker modification work would be done, will be terminated, Stonecipher said.

A Boeing spokesperson in Everett said the company will first try to find other jobs for the 50 or so Everett tanker program workers who Stonecipher indicated might be laid off.

Of the 750 people at Boeing who work on the tanker program, about 500 are in Everett, including the 50 who could be laid off. The remaining 450 in Everett will be assigned to other Boeing programs in the Puget Sound area, the spokesperson said. Workers who might be laid off would not get their 60-day warning notices until March 19, Boeing said.

"This is unfortunate news for Boeing workers and our Air Force tanker pilots, but I believe the delay in production will be only temporary," U.S. Sen. Maria Cantwell, D-Wash., said in a statement.

The tanker deal has been held up since suspicions arose last year that it was tainted by improper contacts between Boeing's former chief financial officer and an Air Force acquisitions official.

Boeing said the slowdown in the tanker program will have no effect on 767 production in Everett. The company's commercial airplane sales team says it has campaigns under way to win more orders for the jet. But commercial orders will be difficult to come by. Airlines are likely to wait for Boeing's 7E7, a plane about the same size as the 767 but far more efficient to operate. The 7E7 won't be available until 2008.

Without more 767 orders, any significant delay in signing the $17 billion tanker deal with the Air Force for 100 planes could speed Boeing's decision to end the 767 commercial line.

As of the end of January, Boeing had a backlog of only 25 767s left to be delivered to customers. Of those, four are listed as 767-200 models for unidentified customers. Boeing won't say so, but sources confirm those four planes are tankers previously ordered by Japan and Italy.

And of the 21 other 767-300s left to be built, 16 will go to two Japanese customers -- All Nippon Airways and Japan Airlines. Those airlines are being wooed by Boeing as launch customers for the 7E7. The Seattle Post-Intelligencer previously reported that Boeing's talks with the two airlines about the 7E7 include a swap of some of those 767s on order for 7E7s. That could greatly diminish the 767 order book.

Boeing has drastically cut production rates of the 767 because of the industry slowdown, and also because it wants to keep the line open until it has a firm deal with the Air Force. Closing the line, even temporarily, would drive up the cost of the Air Force tankers.

Of the 500 people in Everett involved in the Air Force tanker program, about 200 are machinists. They will remain on the program until assembly is completed on the first Air Force tanker plane in mid-May. They then would be redeployed, Boeing said. The non-union workers on the tanker program will be redeployed to other jobs starting in about two weeks, Boeing said.

Representatives of the International Association of Machinists and Aerospace Workers expressed relief that most of its members on the tanker program will be redeployed, but they were upset that Boeing warned another 154 IAM workers yesterday they could lose their jobs in 60 days. The new layoffs are related in part to 747 production, not the 767 tanker problems, according to the union.

One of the 767s now in production was supposed to go to the Air Force as a tanker. When finished in mid-May, it was to have been flown to Wichita for extensive modifications.

Instead, the plane will be put into storage after it leaves the Everett factory, Boeing said, And no other tankers will be produced for the Air Force until the deal has been approved.

"Because important and detailed day-to-day dialogue with our customer is necessary to refine program requirements, we do not believe that continuing development work at the current level of effort is prudent for either the Air Force or Boeing," Stonecipher said in his message to employees.

The Air Force was scheduled to get its first 767 tanker in early 2007.

The tanker deal has been controversial from the start, but was finally approved by Congress late last year after hearings and restructuring of the 100-plane deal to include 20 leased jets.

But before a firm contract could be signed between Boeing and the Air Force, the Pentagon put the deal on hold after Boeing said its chief financial officer, Mike Sears, had improper employment talks with a top Air Force acquisition official who was helping negotiate the tanker deal.

Sears and the official, who had subsequently left her Air Force job and joined Boeing in early 2003, were fired. Boeing Chairman Phil Condit resigned a week later and was replaced by Stonecipher.

The tanker deal is now under investigation by the Justice Department, the Pentagon and Congress. And Defense Secretary Donald Rumsfeld recently ordered a thorough review of whether the Air Force really needs new tankers to replace its aging fleet of KC-135 Boeing tankers.

. "In the end, I remain convinced that these reviews represent the best path toward restoring full confidence in the program and validating the need to get new tankers into the Air Force inventory as quickly as possible," Stonecipher said in his message to employees.

Callan, the Merrill Lynch analyst, said in his report yesterday that it could be a "close call" whether the tanker deal is axed.